Upside Down Car Loans: Is There Hope in Chapter 7 Bankruptcy?

carsA recent story in the Detroit Free Press observed that nearly one out of every three car loans in the United States is “upside down.” Stated another way, the driver is paying more on the car loan than the car is even worth.  And who knows the status of the automobile industry better than the city paper for Detroit, home to America’s automobile manufacturing industry since the industry began?      You can read the article here.

 

This news is even more sobering when you consider that this situation will only get worse for these owners.   When they go to trade their upside vehicle in for some new wheels, they will bake the negative equity from the previous car into their new car loan.  Their only hope is that the car is sturdy enough to keep going after the loan is paid off, so the cycle can be broken.

 

More bad news:  For those with a FICO score of 600 or less, the life of the loan is now averaging 72 months (6 years).  For some consumers, the article observes, the car won’t even be on the road anymore, or it depreciates constantly if it is, but the consumer’s debt does not go away.

 

On top of all of this, the article continues, the average new car price is now approaching $34,000.  So what does all of this mean for the consumer who decides they need to file a Chapter 7 bankruptcy?

 

Will I Lose My Car In Chapter 7?

 

It is extremely rare for a consumer to lose their car in an Ohio Chapter 7 Bankruptcy filing.  For cars which are owned outright, there is currently an exemption for one (1) automobile which is presently $3,775.  If that’s not enough to cover the value of your car, you can add the “wild card” exemption (presently $1,250), bringing the total amount to $5,025.  Ohio law allows these exemptions to rise over time, to keep up with inflation.

 

Research your car’s value to get a realistic idea of what it might sell for, adjusting for mileage, condition, and other relevant factors.  I wrote about the risk of losing secured property in Chapter 7 bankruptcy filings here.

 

If you are leasing your car, then you don’t even legally own it, making it impossible for your Chapter 7 trustee to take it from you.  Finally, if you are making payments on your car, it is far more likely that there is no equity in the car (amount owed on the car is equal to or more than the market value).  But, if there is, you can still use the exemptions described above.

 

722 Redemption to the Rescue

 

If you owe more than your car is worth, the bankruptcy code allows you to “redeem” your car, so that you pay only the car’s appraised value.  Section 722 of the Bankruptcy Code makes this possible.  My office can assist you with finding a lender to step and take over the financing.  You make the new payment directly to this lender.  The former lender is out of the picture, any deficit in the financing is discharged along with your other debts.  Generally, the car must be fewer than ten (10) years old and have less than 100,000 miles to qualify for a redemption loan.  Worst case scenario – you continue to make payments under the old loan, if 722 redemption cannot save you money.  Or, you can always elect to abandon the car.  You will lose the car that way, but you won’t have to make the payments any more.  This is probably your best option if the car is a lemon, or otherwise isn’t a car you want to keep.

 

You can call me at 216-642-8234 to schedule an appointment to discuss options for your car in bankruptcy, and I will make an appointment with you to review all appropriate information.

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